Dairy Talk

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Dairy Reform’s New Window of Opportunity

Dec 04, 2011

The failure of the congressional supercommittee to come to an agreement on cutting the federal budget might be a blessing in disguise for the dairy industry.

The failure of the congressional supercommittee to come to an agreement on cutting the federal budget might be a blessing in disguise.

A lot of folks argued the secretive process used by the committee is (was) no way to make law—especially law that has such wide ranging impacts as the 2012 Farm Bill. Failure to reach agreement on broad budget reforms behind closed doors now creates the opportunity to swing wide those doors, hold hearings and let the sunshine in.

While there’s widespread surface support for the Dairy Security Act of 2012, it is obvious that there’s a lot of unease with provisions of the Act. Processors, of course, are loathe to support anything that might impede supply. But dairy producer organizations in the Midwest and Northeast have also raised deeper concerns. On one end of spectrum, some say DSA doesn’t go far enough in meeting producers’ cost of production. On the other end of that rainbow, some say DSA is far too intrusive in controlling supply.

Consternation was raised exponentially after Mark Stephenson from the University of Wisconsin and Chuck Nicholson from Cal Poly released their analysis of DSA. Their economic model shows DSA can be very effective in reducing price volatility. But the cost of reducing that volatility is nearly $1/cwt. in reduced all-milk prices.

The caveat, both note, is that the model does not factor in a catastrophic collapse of demand, as occurred in 2009 when export markets shrunk 30%. Many dairy producers saw equity erode by $1,000 per cow—or more. If you spread that over a cow’s annual production of say 20,000 lb., that’s a $5/cwt. hit. In that event, $1 less in the all-milk price doesn’t seem too high a price to pay.

Or, if you don’t believe another “Black Swan” will fly into and settle onto dairy markets the rest of this decade, you might think of the $1/cwt. lower milk price as the cost of risk management. Most producers who routinely do their own risk management will spend 50¢/cwt. for marketing advice, margin calls and option premiums. If we turn risk management over to government, as DSA purports to do, $1/cwt. might be the price of that protection.

The $1/cwt. is a doubling of what it might cost the private sector to do it. But can you image the wailing that would be unleashed if there were no government involvement and 2009 recurred?

And then there’s validity itself of the Stephenson/Nicholson analysis. The Food and Agricultural Policy Institute (FAPRI) has done its own analysis and modeling of DSA for the Congressional Budget Office. But FAPRI has not publicly released those results. All that FAPRI will say is that the margins calculated by Stephenson/Nicholson seem low compared to historical norms. That could, of course, be the result of much higher feed prices going forward, or abnormally low milk prices.

In any event, holding public congressional hearings where both Stephenson/Nicholson and FAPRI present their findings would be useful. Such hearings would also allow processors and producers to challenge assumptions and air grievances.

I’m not naïve enough to believe that merely holding hearings will result in everyone coming together in the end. A round robin of “Kumbaya” will not break out. Those on either end of the policy rainbow will not be satisfied. That is a given. Yet hearings allow the opportunity for better consensus to form—and a meeting in the middle for those wishing, willing and able to compromise.